Orascom Construction PLC (EGS95001C011.CA) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to today's Orascom Construction First Quarter 2022 Results Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Osama Bishai, the CEO.

Thank you. Good morning. Good afternoon. I'd like to welcome everybody for the Q1 results call. I'll just make a little bit of an introduction and indicate some highlights, and then I will leave the floor to Reham Beltagy, our CFO, to share with you the numbers, and then we'll open the floor for the Q&A. For Q1, we had a revenue of $980 million with a consolidated EBITDA of slightly more than $50 million for this quarter. Our net profit from operations was $24.1 million. Our net cash position went down compared to 31st of December to around $37 million. It's also important to highlight that our current backlog at 31st of March is $5.5 billion. Two important facts here. We have added $618 million of new awards. The U.S. has contributed 45% of that, which is a good indication about our U.S. operation as far as steady growth and in particular sectors that we are performing well. The other fact is that the total backlog number has been affected by the devaluation in the Egyptian pound that took place in March, which affected the value of some of the contracts that are 100% in Egyptian pound. Also, the degrading value of the euro versus the dollar as we have some of our foreign currency contracts in Egypt are dominated by the euro currency. In Egypt, the additional work is in -- again, in the areas where we have a competitive edge, which is basically also in transportation and in the U.S., mainly commercial and data centers. The most important issue that we need also to highlight. We have been disappointed with the results of BESIX for Q1. Although there has been good indications in Q4 about a reversal of the positive trend that has been escalated, it has been an alarm for us and actually came as a surprise after a good quarter and a good indication of a forecast for a good budget for 2022. During our board, just before the weekend, we have agreed there will be fixed level, there will be some kind of a complete review with our presence first week of June in [ Brussels ] in order to have a better view of 2022 and what are the challenges that they are facing as far as some of the projects that are either they are worried about potential losses or suffered some losses. So it is a serious concern to us. And from my perspective, also the swinging results is another concern that we need to make sure that we go to the root cause of such surprise. But on the other hand, the backlog of BESIX stayed at EUR5 billion. The have added another EUR770 million of additional work in Q1 2022. So obviously, if we have a pro forma backlog of 50%, we are going to exceed $8.3 billion of pro forma backlog, which is again, in the current market conditions, we feel this is a good cushion considering that the next few months or maybe a couple of quarters there is a lot of uncertainty in the whole world, not only in Egypt. Last but not least, we have -- as promised, we have indicated that we are going to continue our dividend policy. We have approved with the board a distribution of $27 million as the first tranche of dividends, which represents as a standalone almost 24% payout ratio. We have to go through a special general assembly and the target is to make the payment towards the end of August. And obviously, this is probably -- this will be the first year that we are consecutively successful to provide dividends to our shareholders. As far as the general operation is concerned, we are continuing to progress in our work. We are again focused on, let's say, maintaining our costs. We are meeting the challenges of inflation not only in Egypt, but towards the rest of the world. And one of the things that obviously we will have a lot of Q&A on that is the fact that some of our projects are affected negatively by the devaluation, whether on the Egyptian pound and the euro, also they are affected from the inflation. And the fact that the projects that are protected by inflation and escalation formula, there is a lag between the implementation of those formulas and there is an impact of maybe 3 to 6 months. So I mean, we are taking the conservative view of allowing for the costs as we are also subject to the indices that will be released either in Europe or in Egypt, plus the fact that the swinging of prices of commodity is quite high and we need to see how much of that will be compensated on those formulas. We are comfortable that they will be, but it will be again subject to the indices that will be released by the market whether in Egypt or in Europe. In order to go into more details on the financials, I will leave the floor to Reham to share with you the details of the numbers.

Thank you, Osama. Good morning. Good afternoon to all. Before we go through our Group Q1 2022 results, I would like to highlight significant events that took place during the quarter. The acquisition of Orascom Services in Jan of 2022 with a total consideration of $35 million, which constitutes positively for the Group's business performance. We distributed the second dividend tranche in Jan of 2022 for $27 million. The EGP to U.S. dollars devaluation in March of 2022, which had minimal impact on Q1 2022 income statement due to the average monthly exchange rate calculation. That said, the balance sheet reflects related to FX rate with normal impact on reserves in our equation. Going through the Group Q1 results, at a high level, Q1 2022 showed positive new awards in both MEA and USA, bringing OC PLC backlog as of March to $5.5 billion. If the devaluation of the U.S. dollar EGP rates have not taken place, our backlog would have been $325 million high. Solid revenue progressed recording year-on-year of 20% on the back of MEA operations, while EBITDA maintained year-on-year at $50 million. Solid performance of our investments, building materials and services subsidiaries, which more than doubled to $11 million this quarter. BESIX negatively contributed to the quarter of $11 million compared to $1.4 million in Q1 of 2021. BESIX loss is mainly attributable to losses and provisions in certain projects in Europe and Middle East. Cash flow and collections were impacted by cyclicality that has been experienced in previous years. We also had an outflow of $60 million in Jan of 2022 for our dividend payment as well as the acquisition of Orascom Services to first quarter. Moving on to having a closer look at our results. Consolidated revenue for quarter one 2022 recorded $980 million, showing a 20% increase year-on-year, driven by MEA's solid progress mainly in Egypt and [indiscernible]. MEA operations is the main contributor accounting for 75.7% of total revenue for this quarter compared to 71% same quarter of 2021. MEA revenue increased by 27.8% year-on-year driven by high progress and projects awarded in H2 '21 onwards and the contribution of Orascom Services entities, achieving roughly $4 million of revenue for the quarter. U.S. revenue year-on-year is in line with last year, but we expect a pick-up in revenue to reflect the doubling of the backlog in the U.S. OC PLC gross profit recorded $91.5 million compared to $82.7 million for quarter one '21. Consolidated Q1 2022 EBITDA marked $50.3 million compared to $51 million in Q1 of 2021, generating a margin of 5.1% compared to 6.2% in quarter one of 2021. This is impacted by lower gross profit margin as well as higher fixed costs as a percentage of revenue due to provision and legal fees. Net profit to shareholders for quarter one '22 stood at $13.1 million compared to $23.9 million in Q1 of 2021, impacted by BESIX negative [ contribution ]. Excluding BESIX, net income of the Group would have stood at $24.1 million for the quarter. On the balance sheet side, equity accounting indices recorded $414.9 million, the majority of which is BESIX investment for $376.6 million in addition to smaller investments, including Orasqualia [indiscernible]. Total equity closed at $662.6 million, movement in reserves of $27.6 million relates primarily to currency translation differences of the Group subsidiary operating in Egypt where functional currency is EGP, which are impacted by the 17% devaluation of the EGP earnings. At the working capital level, trade and other receivables stood at $1.5 billion, marking $19 million decrease compared to the 2021. This [indiscernible] was driven at a stable balance of $1.4 billion. Contract work in progress marked $1.1 billion as of Q1 closing at the same level to December 2021. Advances stood at $1.1 billion in Q1 of 2022, marking a $203.4 million [indiscernible] compared to December '21 million closing. Our gross debt stood at $382 million as of March 2022 closing, reflecting the significant increase of $318 million over the [indiscernible] impacted by production cyclicality as evidenced by the negative cash flow from operations for the quarter of $250 million. Nonetheless, from a cost cash perspective, we closed the quarter at cash of $419 million. Thank you for listening in. And now operator, we are ready to open the Q&A session.

[Operator Instructions] Your first question comes from the line of Johan de Bruijn from 337 Frontier.

A question just from my side. If you strip out all the supply services division, that's -- what was it, $11 million net income. If you strip that out of the core business, what are the margins of the construction business excluding those? And what kind of deterioration are we seeing in the core business -- core construction business margin? And what is your outlook there given inflation and so on? I would have thought that given that a lot of your contracts are in dollars and your costs in local currency that your margins would have actually improve or at least stabilize rather than continue this continuous reduction that we've seen over the last number of quarters. Could you maybe just talk through that a little bit?

I think we lost Osama. Let me check if we can dial him back in. Hi, everyone. Please bear with us as we reconnect the line.

If we look at strictly construction and the road work in Egypt, we are looking at an average of EBITDA margin a little bit more than 7% and on the net income somewhere between 5% to 6%, let's say, around 5% net income. That is without the other operation in the MENA region and without the services and the building materials. Obviously, everybody is asking about what are we expecting on the future. Number one, I think that we will see fruits of having foreign currency contracts when we continue spending towards this year and converting, let's say, the expenses in Egyptian pounds back to the U.S. dollars. That would probably bear some fruit. The only challenge we have is that we have quite a sizable euro contracts. So while we're seeing the uptick due to the devaluation, we're seeing also some part of that is being offset by the euro, let's say, value vis-a-vis the dollar. That will protect us a little bit. But again, what we wanted really to make sure is -- what is more important for us really is to assess what will happen on the compensation for escalation using the indices and the escalation formulas, which is almost subject to the numbers that are released whether in Europe or in Egypt or elsewhere so that we kind of offset the additional cost. We are being -- to be honest, we are being maybe a little bit on the conservative side, but the spikes we're seeing on raw material is quite unusual and we have not seen how these big gaps in the raw material -- we need to verify that it will be properly compensated under the escalation formulas.

Just one point of clarity. On the dividend strategy, are you intending to pay 2 dividends a year? I think you mentioned that this is the first tranche of the dividend. Is that correct?

That's correct. Our intention is to continue our policy. But obviously, you appreciate that we would like to look at how the cash flow is progressing over the year, over this year, but the intent is to have 2 tranches. And this would be -- the size of the second tranche should be confirmed during our board in November this year.

And sorry, just one last question for me. There's a new acquisition, how has that gone? Is that complete now? Is that fully incorporated as far as systems and people and all that? And is the outlook there still good?

First of all, the numbers are consolidated within the Q1 numbers. As far as the integration and as far as management, I think it's progressing very well. Maybe a little bit more detail to tell you how progressing it is, they have moved to our headquarters actually some time in February, a few weeks ago, in order to have more integration with our procurement, our project controls, our cost, our finance. So that's really progressing well. Obviously, they have some challenges as far as the foreign currency availability for -- with certain clients. And again, what we're trying to do in order to safeguard their KPIs and their good results is to maintain some kind of diligence on signing contracts with clients in the proper currency, in the right format with the right payment terms in order to safeguard the financial health of that subsidiary.

And your next question comes from the line of [indiscernible], private investor.

I want to ask about BESIX. I don't see any value of retaining 50% without management control. And the earnings for BESIX for the last 5 years was a drag in the balance sheet of Orascom. So my question to you is, why you are not buying the rest of 50% with some partner, with another part equity group or we can sell our stake with very high value because of the NIM of BESIX? And it's very weird for me to keep a very big business who are losing money for the last 5 years without making any action. And second, I'm asking about Saudi Arabia from one side and Iraq and Libya from other side. You know the story of growth of Saudi Arabia in the next 10 years. Do we have a plan to partner with a big construction company in Saudi? And for Iraq and Libya, 2 greenfield countries and they need everything from scratch, as we say in Egypt. So do you have like 5 year plan for Iraq and Libya? And what's your expectation also for Saudi Arabia?

Let me start with the easy one and then with a more difficult one. As far as the region is concerned, we are extremely focused on the region. I'm sure you are aware that we have been part of a group of contractors that was supported by the Egyptian Government to receive contracts and execute work in Libya. This is ongoing discussions so far. As far as the region is concerned, we are extremely focused on the region. I'm sure you are aware that we have been part of a group of contractors that was supported by the Egyptian government to receive contracts and execute work in Libya. This is ongoing discussions so far. We are looking at Libya strategically and we believe we would like to be a first mover to Libya. We will not wait until things are extremely organized, then it will be an open market for everybody else. So yes, on Libya, we are doing that. And the same for Syria. On Syria, there is a little bit more of a challenge., is that we are monitoring the situation and we need also to see where is the money coming from to finance the reconstruction of Syria. And actually, it's not happening as we speak. And obviously, or unfortunately, with the current events in Europe, Syria was going to take, let's say, a back seat as far as priority is concerned. Iraq, we have never left Iraq. We have some kind of a representation there. We have been building a power plant that was -- and then we had to evacuate our team 2013 when there was the ISIS crisis. We are in discussions with the Iraqis on potential pipeline of work and we are monitoring that very closely. We are more optimistic now because obviously we see that the windfall coming from the, let's say, price increases in oil and gas would help Iraq to be able to better implement their works. And so that's as far as Iraq is concerned. As far as Saudi is concerned, a few things. First of all, we have a presence in Saudi. We are currently executing the water treatment plant in demand for a concession for a special purpose vehicle and we are progressing very well, and the project is doing very well so far. We are discussing with different players on the future projects. We understand that the new requirements in the Saudi market is to maximize the local Saudi content. We are discussing with several Saudi potential partners to see how can we form a long-term alliance to that. So we are not -- let me put it this way, we are not silent or sitting waiting for things to happen in Saudi. On the contrary, we are going there, we are present, we are talking to other people, but we would like to be selective as far as the contracts that we sign there. We need to make sure that payments is secure. We don't want to go unnecessary and get contracts with, let's say, unacceptable returns. So it is part of our plan. I would like to put a 5-year plan, but in the Middle East it's quite challenging to make a 5-year plan due to the political situation, particularly in the countries such as Libya, Syria and Iraq. Going back to BESIX, number one, we are fully aligned that the results of BESIX have not been up to par. It is not something that we are satisfied with. The concept of acquiring BESIX or selling our share in BESIX is, a few things are governed by our shareholders' agreement with our partners in BESIX. This is number one. Number two, that the current market conditions would not give BESIX the fair value if we are a seller. And obviously, our other partners, they will have the same view. They want to -- if they are a seller, they will not look at the current valuation because again it will be not favorable due to the results in the last few years. I have to also look back at the overall picture. BESIX have been a great investment for us. If we look at the return on investment since the acquisition in 2004, this has been a great investment for the shareholders. But that's not an excuse. As I mentioned, we are looking at this very carefully. We are having serious discussion with management, not only on the results but also on what kind of steps we take forward. Obviously, we fully understand, and it's not only for the shareholders, it is for us, as Orascom Construction, we would like to see how can we maximize the value of BESIX to us either through value creation or monetization. And that's part of that. I wish I could give you much more flavor on the BESIX situation. But we are bound by the relationship that we have with our partners and the shareholders agreement.

[Operator Instructions] Your next question comes from the line of Darren Smith from 337 Frontier Capital.

Two questions from me. Can you just remind me of the seasonality behind cash flow? Where does Q1 sit in that? It looked -- it's obviously quite weak for the first quarter, but do you expect that to improve as the year goes on? And then second, I know you're probably tired of asking -- responding to BESIX. But do you know -- what indications do you have about the weak Q1? Is that like a couple of single projects? Is it just the global environment? Are there any other details that you can give us in terms of where the disappointing results came from?

First of all, on the seasonality of cash, if you recall, historically, we have been always on the soft side of cash receiving in Q1. We always have a very strong Q4, sometimes too strong, like last quarter, this one is. We believe that Q2 usually is better. I need to be prudent and be cautious because due to the economical situation in Egypt, I would assume Q2 will be -- there is an improvement. But I would expect that the improvement will be gradual between Q2 up to Q4 due to the fact that the government has certain obligations as far as paying extra money for the wheat, for the oil. There are other things that are out of our hands. But I believe we're starting seeing some improvements. But I believe that, as I told you, this would go gradually on the positive side throughout the year. As far as BESIX, first of all, again, it was a surprise to us. And because we have released the results almost in March, so that's less than 2 months ago, and we see that for the Q1 after that. So there are a few projects I think a couple in Europe, in Belgium and the Netherlands, and there's a couple in the Middle East, in Dubai. We are looking at today, as we speak, whether it's a real loss and -- or whether it's just an adjustment of cost to complete margins and you are being on the conservative side. We are also having discussions with BESIX on project controls and the ability to be able to forecast and have a better visibility on project completion costs because this is quite unusual for them to have those swinging. I mean, because they have a bad year or a bad couple of years, but when you have a Q4 that you start showing positive results and just few weeks later, that this is quite a little bit on the abnormal side. But yes, it is a couple of projects that we're seeing and we are digging if this is the end of that or not. And if there is more to come, we would like to flush that out and make sure that there are no more surprises.